It’s no surprise that “Greeks are spurning the…bitter medicine” imposed by the European Union/International Monetary Fund bail-out programme, says Fidelity. But “the violence of the rejection is a shock”. In Sunday’s elections, the two major parties committed to the bail-out – the centre-right New Democracy (ND) party and the centre-left Pasok – received just 31% of the vote.
ND has failed to form a coalition with any of the five other parties that now hold seats, so the onus is on the second-largest party, Syriza, the Coalition of the Radical Left, to form a government. Any such government would be composed of anti-austerity parties, implying Greece’s withdrawal from the bail-out programme and a default. However, Syriza may well be unable to form a coalition, as it would have to link up with a fascist party.
The result is that a new election is likely to be called and held in June. The political stalemate and prospect of a default have sent the Greek stockmarket to a 20-year low. The immediate worry is that Greece won’t be able to count on the €31bn that is supposed to be disbursed this quarter in return for parliament approving further cuts by the end of June.
A government source says Greece has enough money to last until the end of July. The programme would also be endangered if the outcome of the next election is just as indecisive, or represents an even bigger anti-austerity vote than this one. But even if there is a pro-bail-out majority, notes Capital Economics, “this would inevitably slim as economic conditions worsened”. So uncertainty over the future of the bail-out deal will endure.
If Greece does reject the plan, it’s hard to see how it can stay in the eurozone, says Hugo Dixon on Breakingviews. Without rescue-package funds, it would have to “squeeze the budget even more drastically” and there would be no money available for recapitalising the banks, plunging them into a severe crisis. So exiting and allowing a new, weak currency to bolster the economy will seem tempting.
But that could set off a chain reaction as markets expecting other troubled countries to exit and default on their euro debt send bond yields sky-high. People rapidly moving their cash out of peripheral countries before a devalued legacy currency returns could lead to bank runs. An ever-more likely Greek exit looks set to cause further upheaval.